the fifth finnish-baltic seminar of agricultural economists

THE FIFTH FINNISH-BALTIC SEMINAR OF AGRICULTURAL ECONOMISTS
Helsinki, Finland, June 12-14,1995
The evolution of the CAP in the European Union: some personal
reflections1
Tomás García Azcárate2
1
The views expressed in this talk are those of the author, and do not necessarily represent the official views of
the institution for which he works.
2
Deputy Head of Unit for studies and overall approach, European Commission Directorate-General for
Agriculture.
1
I. 1992 CAP reform
In this introduction, we will first underline what were the main
characteristics of the agricultural situation in the European
Union (EU) in 1992, which advocated a major reform of the Common
Agricultural Policy (CAP). Secondly, we will present the main
objectives pursued and instruments employed.
The needs for reform
There is a huge consensus in the academic world on the analysis
of the consequences of the traditional CAP3. These points have
to be remembered today if we want to understand today why the EU
decided to reform its agricultural policy in the way it did in
1992. Some of the most relevant points seem to be:
-a simultaneous increase in EC budget expenditure on
agricultural markets and decrease of the agricultural net
value-added (*).
-a system which links support to agriculture to amounts
produced stimulates production growth and thus encourages
intensification of production techniques. This development,
if unchecked, leads to negative results. Where intensive
production takes place, nature is abused, water is polluted
and the land empoverished. Where land is no longer
cultivated because production is less dependent on surface
areas, abandoned and wilderness result
-the prices and guarantees provided through intervention
and production aids stimulate output and discourage demand,
as it has been observed in the case of animal consumption
of cereal (*).
The main objectives
The main objectives pursued with the 1992 CAP reform can be
divided in two groups:The medium term and the short term.
In the medium term,
-sufficient numbers of farmers must be kept on the land.
There is no other way to preserve the natural environment,
traditional landscapes and a model of agriculture based on
family farms as generally favoured by society.
This requires an active development policy and this policy
will not be created without farmers.
3
Gardner (1987), De Veer (1987), Coulomb y Delorme (1987), Comolet (1990), Hervieu
(1991), Burrel (1992), Koester et alt (1992) y Tangermann (1992).
2
-to recognize that the farmers fulfills, or at least could
and should fulfill two functions viz firstly that of
production and secondly of protecting the environment in
the context of rural development.
In the short term,
-to clean up the EU cereal market, increasing consumption
and decreasing the level of intervention stocks;
-to discriminate in favour of the extensive stockbreeders;
-to support farmers more directly, instead of supporting
products.
The main instruments
The main instruments used in the 1992 CAP reform are:
-a 29% decrease in intervention prices for cereals, on
average;
-compulsory set-aside;
-per hectare (crops) and per head (animals) subsidies,
based on historical references for yields, areas and herds,
and
-accompanying measures to encourage extensification, early
retirement and re-forestation.
2.
A reform that works
The reform of the CAP was not unanimously welcomed in
agricultural circles,4 or by agricultural economists. When we
re-read some of the criticisms published,5 we realize how flimsy
were the grounds for the fears expressed, which stemmed from a
basically pessimistic attitude to the prospect of considerable
change (Pelletier, 1995).
4
5
Le Cacheux and Mendras, 1992; Hervieu, 1993; Sumpsi et al., 1994; Tabary, 1995.
e.g., in Spain, Tió (1991 and 1993) and Lamo de Espinosa (1991 and 1993); in France, Bazin and Kroll
(1992), Bourget (1992), Houillier (1992), Boulitie and Vermersch (1993), Cazals (1993)
and Jacob (1994); in Germany, von Cramon-Taubadel (1993). More recently, Marin
(1995), on the basis of a "study" by the COPA, which turned out to be not only out of date,
but mistaken from the outset.
3
However, the facts are stubborn. At the level of the European
Union as a whole, we should mention the following.
-Demand for cereals has increased in the Community, mainly
for animal feeding. TOEPFER Internacional estimated the
increase at 6.7 million tonnes in 1993/94, while demand
remained steady in 1994/95; STATEGIE GRAINS calculated an
increase of 9.7 million tonnes in 1993/94, and a slight
decline, of 1.2 million tonnes, in 1994/95. In terms of the
substitution effect, the main casualty of this increase in
the consumption of cereals has been cassava (Couty, 1994).
-Output of cereals in the Union stood at 176 million tonnes
in 1993/94, and about 173 million tonnes in 1994/95.
-Intervention stocks were around 10 million tonnes at the
end of the 1994/95 marketing year, compared with 33 million
tonnes at the beginning of 1993/94.
-Intervention stocks of beef were around 40 000 tonnes in
February 1995, compared with 1.2 million tonnes at the
beginning of 1993/94.
Many of the consequences of the reform cannot be quantified.
-Farmers' behaviour patterns are changing, as they move
towards "economic extensification" or "rational farming".6
-Market prices are less and less under the influence of
administrative prices, and much more dependent on supply
and demand;7 they are also affected by producers' decisions
(Fischler, 1995(a)).
-Farmers are taking more interest in the quality of
products, and in quality products, rather than in purely
quantitative aspects.8
6
See, for example: Cormorèche, 1993; Agreste, 1994; APCA, 1994(a); Bonny, 1994; Cordes and Colson,
1994; Joslin, 1994; Lemaitre and Mehier, 1994; Schmitter, 1994; Blogowski and Boyer,
1995; Delaveau et al., 1995; Lemaitre, 1995; Mathe, 1995; Neveu, 1995; Perrier-Cornet
and Capt, 1995; Pouch, 1995; Thomas, 1995.
7
AGPB, 1994; Rio, 1994.
8
Hervieu, 1992; Le Cacheux and Mendras, 1992; Laluc, 1994; Ligny, 1994; Deger, 1994, 1995.
4
-An agreement has been reached under the GATT conferring
international recognition9 and stability on the CAP
(Delorme, 1993). Without the reform, the GATT agreement -or the trade war that would have started if the agreement
had been delayed -- would have marked the beginning of the
end of European agriculture (Cloos and Tung-Laï, 1994).
With the reform, a sort of natural alliance has been formed
between the United States and Europe, reflecting the
similarities between the situation of their agricultural
economies (Delorme, 1995).
-The European Union has availed itself of a new instrument:
set-aside, to manage markets in the post-GATT situation,
where it is not so easy to resort to the machinery of
intervention stocks (Chol, 1994). For example, the market
situation has made it possible to reduce by 3 points the
percentage of compulsory set-aside land for recipients of
aid introduced by the reform for arable crops.
-Area aid has acted as an agricultural insurance policy for
years of low output, when belonging to a Community market
permanently in surplus prevents prices from rising to
offset the poor harvest. This is particularly important in
countries as Finland, the baltic States and Spain where
yields varie significantly from one year to another.
These results are not exclusively due to the reform of the CAP.
The tendencies promoted by the reform have been underpinned by
other factors, such as weather conditions in Europe (Albisu et
al., 1994), floods in the United States, the drought in
Australia due to "El Niño" (Wuethrich, 1995), the devaluation of
some European currencies (Sumpsi,1994) or favourable development
of the dollar. It is also true that undesirable effects have
been observed, such as "subsidy cropping" by farmers (Gámiz,
1994) and bureaucracy.10 Without going so far as Burrell (1992),
who describes the reform as a "work of art", we should not let
the adverse effects blind us to the fact that, on the whole, the
reform achieved its objectives, and the general situation of the
agricultural sector in Europe is better now than it was a few
years ago (Santer, 1995).
9
Legras, 1993; Gonzalez Aleman, 1995; Steichen, 1995.
Koester and von Cramon-Taubadel, 1992; Caron, 1994.
10
5
The Commission believes that multiannual agricultural price
fixing was a positive measure which contributed to creating a
climate of security and stability, thus encouraging investment
and entrepreneurial decision-making. Consequently, prices and
subsidies have been fixed not only for the transition period,
but also from the 1995/96 marketing year. The Commission did not
achieve its aim. It was widely believed, against the background
of the uncertainty that affected much of the farming world
following the reform, that aid could be phased out by the end of
the 1995/96 crop year (Burrell, 1992). With the passage of time,
feelings have calmed down and things have been put into
perspective.
In brief, then, the reform works well on the whole, and there is
no need to undertake major changes in the short term (Fischler,
1995(b)).
Does this mean that there are no factors of change for the
common agriculture policy in the medium to long term? By no
means; but the European Union has plenty of time to analyse and
prepare the changes needed.
3.
The probable accession of the countries of central and
eastern Europe
Mr Steichen, former Member of the Commission, stated in his
valedictory article that, as well as the institutional question,
one of the basic issues to be resolved before any eastwards
extension of the Community was how to safeguard common policies
built up over forty years, among them the CAP. Should the CAP
change drastically once again, to meet the challenge, or should
we think in terms of development on the basis of the principles
set out by the 1992 reform?
There
have
been
numerous
studies
of
the
forthcoming
enlargement,11 and estimates of its cost to the Community
(anything from ECU 5,000 million to ECU 50,000 million).
A reasoned analysis of the situation, which is an indispensable
prelude to the impact analysis (not to say the budgetary
calculations) must take account, among other things, of the
following factors.
-Since the reform of the CAP, Community prices have been
fixed in current ecus. With the passage of time, this has
meant that the reform includes arrangements for gradual
decline in agricultural prices in real terms.
11
E.g. the four studies commissioned by the Commission's DG I (External Relations): Buckwell, 1995; Mahe,
1994; Tangermann, 1994; Tarditi, 1994; the study by the UK farming union: NFU, 1994;
the study by Nallet and Van Stock, 1994, at the request of the Commission's DG for
agriculture.
6
-The agreements of the Uruguay Round, and
decline in subsidized exports, will have
on world prices. The most recent report
1995 OECD report, stresses and quantifies
in particular the
a positive impact
I have seen, the
this trend.
-The much-discussed gulf between Community prices, world
market prices and prices in the countries of central and
eastern Europe may well be considerably smaller than a
simple statistical analysis implies (OECD, 1995).
-The right way to estimate the real productive potential of
the countries of central and eastern Europe is certainly
not to multiply the area under cultivation by the average
Community yield (or by the French yield for cereals and the
Dutch yield for milk)! In Spain we have suffered for years
from criticism of our wine-producing potential, as
calculated on the basis of our enormous areas of vineyards,
and our capacity to bring our productivity into line with
the Community average (overnight, no doubt). That such an
objective is clearly ridiculous does not seem to be a
consideration.
-There are factors hampering, if not actually blocking,
economic
development
in
general,
and
agricultural
development in particular. They include, among other
things,12 the deterioration in the internal market, the
size of the structural changes needed in the productive
sphere and the agri-industrial complex, the enormous
financing requirement that is not matched by financing
capacity (when capital exists, it is often channelled, not
towards activities like farming, but to other more
profitable sectors), political uncertainty, both locally
and across the region (Balkan conflict, situation in the
former Soviet Union, etc.).
-The Uruguay Round has affected the national agricultural
policies of the countries of central and eastern Europe.
Although most of them have some scope for keeping out
imports, the limits on subsidized exports and internal
support will be applicable.
Davidova and Buckwell (1994) correctly pose the problem: it
involves identifying the minimum indispensable change to the CAP
to enable enlargement to take place. It does not seem reasonable
to promote drastic change, which always leads to radical social
and
political
consequences,
as
a
protection
against
a
hypothetical conflict situation that might arise within ten
years or so.
12
Jackson and Swinnen (1994); Kwiecinsky (1993); Pouliquen (1994).
7
4.
Some conclusions on some guidelines for a new CAP
A group of leading economists has provided an interesting study,
commissioned by the DG for economic and financial affairs, on
"EC agricultural policy for the 21st century" (Munch et al.,
1994).13 This study, which does not commit either DG II or the
Commission, puts forward an alternative for radical change to
the CAP, summarized as follows.
-The role of the Commission should be merely to ensure the
smooth functioning of the internal market and avoiding
distortions of competition. To this end, its powers should
be reinforced.
-Community prices should be aligned on world market prices,
with total liberalization of the market at the end of the
transitional period: Community prices at world levels,
disappearance of milk quotas and sugar quotas, etc.
-While income support is clearly necessary for social
reasons, its cost should be borne entirely by the Member
States.
-National aid would be authorized, if it were totally
independent of output levels, and governed by social or
environmental criteria.
-However, the Social and Structural Funds, and the Cohesion
Fund, should be reinforced.
This suggestion raises a number of questions, and in particular
the following.
-What would happen in the Member States with budget
problems, which could not afford to finance the national
aid? The Commission's Director General for Agriculture, Guy
Legras, has said that it would be "madness" to think that
the present compensatory aid introduced by the 1992 reform
could be charged to the Member States (Legras, 1995). The
richest countries would give away large sums, with which
the others could not compete. This aspect of the question
is
emphasised
by
Barato
(1995)
in
a
remarkable
contribution.
-How far is this approach, which implies increased public
expenditure, consistent with the achievement of the
objectives of economic convergence set out in the
Maastricht Treaty, especially for the Member States whose
economic situation is less buoyant, and which will
therefore find it more difficult to achieve the objectives?
13
Other recent work, some by researchers belonging to the team that drafted the report, include suggestions
matching those of the study: for example, Buckwell, 1994; Franklin and Ockenden, 1994; Felton-Taylor et
al.,1994; Tarditi and Marsh, 1994 (although these two repeat their suggestion that present public aid from the
CAP should be replaced by financial premiums of limited duration); Tangermann, 1994.
8
-How far would the Commission be empowered to prevent the
national aid from distorting free competition within the
internal market, and from undermining not just the
foundations of the common agricultural policy, but also
those of Europe itself?
-How does this increase in the Commission's political
powers to supervise and control actions by the Member
States fit in with the declared intention of developing the
application of the principle of subsidiarity?
-How are the environmental consequences of such a radical
proposal taken into account? Two of the most influential
ecology groups at European level, whose studies on the CAP
and CAP reform are among the most reliable and valuable,
the UK Royal Society for the Protection of Birds (RSPB,
1995) and the Netherlands Society for Nature and the
Environment (NSNE, 1995), do not think that proper account
has been taken of this aspect.
The worst attitude towards those who want to see the end of the
specific features that have so far characterized the western
countries' agricultural policies is total opposition, in the
name of the basic principles laid down in the Treaties, to any
proposals for change. Setting conditions for the forthcoming
eastward enlargement, as the COPA did (1994), does not seem to
be the best way of ensuring that due thought is given to the
matter.
The following guidelines could inform reasonable change, which
would help us to meet the challenges outlined above, while
consolidating the essence of a modern agricultural policy.
-Traumatic proposals equating eastward enlargement with the
destruction of western rural societies should be avoided.14
-Environmental policy and agricultural policy should be
better integrated.15 Aid from the reformed CAP could be at
least partly conditional on meeting a set of environmental
requirements. This would mean overcoming the practical
problems of setting in motion cross-compliance on a large
scale (see García Azcárate, 1993).
A similar tendency is apparent in the United States.
Although it seems unlikely that it will manage to influence
the new Farm Bill, at present under discussion, an
innovative coalition of ecology organizations, university
economists and farmers' organizations is gathering strength
(Debar, 1995).
14
Fischler, 1995(c); van Stock, 1995.
Le Cacheux and Mendras, 1992; Hervieu, 1993; Caron, 1994; Anderson, 1995; Netherlands Society for
Nature and Environment, 1995; Pouch, 1995, Roy, 1995; Royal Society for the Protection of Birds, 1995;
Russell and Fraser, 1995.
15
9
-Agricultural policy should be better integrated with rural
development policy. Many analysts16 have called for an
integrated target in which, alongside specific or sectoral
measures to promote given situations, other programmes or
projects would be adopted with a real impact on local
development, environmental protection and conservation,
enhancement of local resources, and incentives for new
sectors or branches of activity. In Andalucia, for example,
CAP aid is the second most important source of foreign
exchange, after tourism. It is logical and understandable
that the regional authorities wish to maximize the
efficiency of such public investment for the countryside.
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